YVR's Transformation

Vancouver Int'l is serving as a model for the new Canadian
airport, one with experience it can export

BY John F. Infanger, editorial director

Januray
/ February 1999

VANCOUVER, B.C. —
In 1992, ownership of the Vancouver International Airport (YVR) was transferred
from the federal government — Transport Canada — to a not-for-profit corporation.
The move not only signaled the beginning of a total transformation in
how airports were operated in this country, but in time it would demonstrate
what such a transfer could mean to a critical airport in the national
air transportation system when it takes a more localized, businesslike
approach.

The ensuing six years
have seen dramatic growth in infrastructure development and passenger
counts. No less significant has been the aggressive posture taken by those
in control at YVR, who have taken technology and management principles
by the horns and wrangled them to their advantage. So much so, in fact,
that they are exporting what they've learned here to other airports worldwide.

"Vancouver Airport
is a great example of how a strategic plan helped shape the whole direction
of the airport," explains Paul Ouimet, an executive with VISTAS,
one of two offshoot subsidiaries that are exporting the YVR experience.

"In the strategic
planning that was undertaken when it was first converted to an airport
authority in ’92," he continues, "it was very much a regional
airport. The strategic plan identified that there was a tremendous opportunity
at YVR, given its geographic location. We were the closest (North American)
airport to the Asia-Pacific in terms of polar routes.

"With that in
mind, we completely changed the mindset of the airport from an operations,
engineering, and marketing perspective.

"There was a
need at that time for a new terminal building. So, we designed an international
terminal specifically for connecting traffic. The strategic plan played
a major role in guiding the development of the master plan."

The plan appears
to be working. Passenger growth since 1992 has grown from 10 million annually
to 15 million in 1998. With the pending One World alliance among major
air carriers, YVR is projected to become a major North America-Asia hub.

Since the transfer,
the international terminal has been completed, along with completion of
a new parallel runway, a new control tower, and groundbreaking for an
adjacent hotel. The 1995 Open Skies accord with the U.S. has accounted
for an increase in direct service from six cities to 21, and a similar
opening up of air policy internationally by Canada has increased overseas
service.

As the Canadian airport
transfer process continues, Vancouver is serving as one of the models
to emulate. A second subsidiary, Vancouver Airport Services, has been
involved in transfer negotiations for several airports and currently manages
five such facilities under contract. Meanwhile, YVR officials are maintaining
their aggressive posture, not only locally but at airports in South America,
the Caribbean, and beyond.

THE TRANSFER EXPERIENCE
Local legend has it that Charles Lindbergh once shunned a stopover in
Vancouver because its landing facilities were inadequate. Such spurning
by the most prominent aviator of the day led to the local populace approving
$600,000 in financing for a new airport, opened in 1931 on Sea Island,
just south of downtown.

As dramatic a change
that may have been at the time, it dwarfs in comparison with the changes
that have come about since the Vancouver International Airport Authority
assumed ownership and control under a 60-year lease agreement in 1992.

According to data
compiled in 1997, some 6,384 new direct jobs were created at the airport
from 1994-1997, for a total of 22,874 — more than two traditional staples,
mining and fishing, combined. That employment total alone accounts for
$1.3 billion (Canadian dollars) in GDP value added to the regional economy
and $815 million in employment income.

While evolution, even
revolution, may be an appropriate term to describe the transfer process
here, locals have another word for it. Says YVR Authority president and
CEO Larry Berg, "The devolution of airports ... has allowed the communities
to guide the development and expansion of the airport in each community
in keeping with local economic objectives

"We're profitable,
but not-for-profit, which means the profits are reinvested within the
airport business." In 1997, net earnings were recorded as $44 million
(CAN), up from $41.3 million in 1996.

Berg, like a number
of other newcomers to the Authority in 1992, came from another industry
— mining. He was originally hired as senior vice president of operations;
others came from real estate, banking, and other business sectors. Under
the transfer terms, employees could move to other positions within the
federal government or stay at YVR for a guaranteed two years.

Explains Berg, "There
was some trepidation after the original two-year period, a feeling that
the other shoe will drop. It came and passed and those concerns were soon
behind us.

"In hindsight,
the transition went quite smoothly. The capacity for people to accept
change is generally underestimated. It could be that we should have torn
the bandaid off more quickly."

At the same time,
Berg says productivity gains have led to an increase in staff size by
20 percent in six years while capacity and facilities have doubled in
size. He points to subcontracting of services and productivity gains as
reasons for slower direct airport employment growth. Meanwhile, he says,
employees have seen wages increase above the Vancouver norm. In fact,
the 1997 study puts airport wages at an average $40,540 (CAN) per annum,
26 percent higher than the provincial average.

INVESTMENT PRIORITIES
YVR was profitable when the Authority assumed control, but Berg says the
rapid development could not have occurred under the Transport Canada template
that would have seen national bureaucratic processes butting heads with
local potential and priorities.

"The immediate
challenge was to focus on the capital development program — build a new
terminal, a new runway, a new control tower," he says. " The
transfer had to be organized around business processes rather than around
the functional environments. It took us a while to work through that."

A $300 million bond
issue was attained, to be paid back through a graduated $5-10-15 Airport
Improvement Fee — similar to Passenger Facility Charges in the U.S.

In 1998, the AIF
was projected to bring in $50 million (CAN). In 1993, airline fees were
increased five percent, with an agreement to hold fees for five years
after that. "It allowed our business partners to project their costs,"
says Berg, "and put the heat on airport management to manage."

After that, growth
was focused on building retail and concessions, first in the new international
facility and then in the domestic terminal, which is currently underway.

"We went to
the European model on retail," explains Berg. "What we're doing
is trying to build airline traffic. To do that, you've got to be cost-competitive
and hold your charges down. To do that, you've got to cater to retail,
and how you do that is with street pricing." Subsequently, YVR developed
an "intermix" of lease arrangements: a head lease with Host
Marriott; smaller lease agreements with other concessionaires to "ensure
competition;" and, leases with regional shops to ensure a British
Columbia flavor.

TECHNOLOGICAL PROWESS
Kevin Molloy, VP of information technology, has spearheaded the leading
edge technological push at YVR, which is evident throughout the new terminal.
Incorporation of Common Use Terminal Equipment, installed by U.K.-based
SITA, allows for airlines to "plug in" to their host computers
on demand. It allowed YVR to reduce the size of its needed facility space
by 30 percent, says Molloy.

In December, the
airport unveiled the first of its computer kiosks that allow for internet
access, and will soon provide interactive customer support services.

To provide stronger
support for managment, the information technology staff is required to
go through airport business training.